Cost Cuts May Raise American Airlines Safety Concerns as Virus Expenses Rise

Despite the air travel industry taking it on the chin from the novel coronavirus, I must give credit where it’s due: the sector isn’t going down without a fight. And at least for American Airlines (NASDAQ:AAL) investors, its fighting spirit paid off for AAL stock.

Turbulence Ahead for AAL Stock as Cash Preservation Rules
Source: GagliardiPhotography / Shutterstock.com

However, don’t get too complacent as a longer-term headwind may be lurking over the horizon.

First, though, let’s discuss the good news. According to a Reuters report, the Environmental Protection Agency will issue an emergency exemption to the state of Texas which would allow American Airlines to use a surface coating that kills coronaviruses for up to a one-week period. Though American refused to comment, the disclosure created a surge of momentum in AAL stock.

But it wasn’t just AAL that experienced upside. Rivals United Airlines (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL) enjoyed a similar boost of enthusiasm. With another weapon against Covid-19, this announcement should help facilitate the industry closing the consumer gap.

As I argued recently in a story covering JetBlue Airways (NASDAQ:JBLU), it’s encouraging that more people are flying. However, volume compared to last year is still disconcertingly low. Moreover, the average miles flown per passenger has dropped from nearly 1,200 to 542.

In my opinion, the fewer air travel miles suggest that the people who are flying are doing so because they have to. Otherwise, if people were flying for leisure post-pandemic, you’d expect the average miles flown to be roughly in line with pre-pandemic figures; only the number of people flying should noticeably decline.

But with a coronavirus-killer at its cleaning crews’ disposal, just the perception alone should be enough for AAL stock. Still, American may have another problem.

Cost-Cutting is a Huge Concern for AAL Stock

Most stories covering air carriers today focus on consumer demand in the new normal. That’s completely understandable because the coronavirus has disrupted everything. But for AAL stock, the pressured environment may lead to worrying questions.

Out of the major airlines, American features one of the ugliest sets of financials. Logically, many of my InvestorPlace colleagues have argued that if you must buy in this sector, go with a more robust name like Southwest Airlines (NYSE:LUV). Another reason to run with this thesis is that financial pressure tempts poor decisions.

Specifically, I’m worried that cost-cutting measures will hit mission-critical areas, such as aircraft maintenance. While I don’t like bringing up macabre topics, you should note that this concern isn’t isolated to the coronavirus. For instance, in December 2003, the Baltimore Sun reported that airline cost-cutting worried safety experts.

After the economic slowdown in 2000 and the terrorist attacks the next year, the airlines’ fortunes fell sharply. The industry has lost about $25 billion since the start of 2001.

Airlines cut total maintenance spending more than $1 billion from 2000 to last year. Maintenance spending per flight dropped about 4% in that period.

For the top nine major airlines, maintenance spending per flight dropped 1%.

More recently, former Boeing (NYSE:BA) engineers blasted the company for cost cuts that may have resulted in two fatal crashes involving the now-notorious Boeing 737 Max 8 jetliner. And that was before the pandemic, during a time when everyone thought that outside of the Max incidents, Boeing was fiscally on the up and up.

But with an existential crisis threatening AAL stock and others, you’ve got to wonder again about airliner safety.

Dark Cloud Over the Industry

If there’s some good news in this matter, I don’t believe a correlation has been established convincingly between economic downturns and air traffic incidents. Over the years, air travel accidents have declined while the customer base has increased. Statistically, flying is one of the safest forms of travel.

Air traffic fatalities worldwide vs. U.S. GDP
Click to Enlarge
Source: Chart

Still, I can’t help but notice there was a sizable uptick in worldwide air traffic fatalities in 2010, amid the fallout from the Great Recession. Further, cost-cutting is a natural course of action for any downturn, whether that be economic, terrorism-related or, as likely, pandemic-fueled as well.

Finally, as I mentioned near the top, average miles flown per passenger is declining. This also suggests that airliners are flying shorter routes more frequently than usual. I’m not an aircraft mechanic but I imagine the higher frequencies of takeoffs and landings put additional strain on airplanes. Therefore, I surmise that the Covid-19 pandemic requires more maintenance if money is no object.

But it is an object. And you can’t deny that executives aren’t eyeing any means to save money. Please don’t get me wrong — I’m not suggesting that anyone is derelict in their safety obligations — but if an incident does occur, this may have a disproportionate perceptional impact in the new normal.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/cost-cuts-are-a-huge-concern-for-aal-stock-as-virus-expenses-rise/.

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